## SA 500: Audit Procedures for Obtaining Audit Evidence

### Two Broad Categories of Audit Procedures

```

Audit Procedures

├── Risk Assessment Procedures

│ (Understand entity, environment, and internal control

│ → identify & assess RMM at FS and assertion level)

│

└── Further Audit Procedures

├── Tests of Controls

│ (Evaluate operating effectiveness of controls

│ in preventing/detecting/correcting material misstatements)

│

└── Substantive Procedures

├── Tests of Details (SA 500, 501, 505, 510)

└── Substantive Analytical Procedures

```

---

### Seven Specific Audit Procedures

Mnemonic: I O E Re Re A I (Inspection, Observation, External Confirmation, Recalculation, Reperformance, Analytical Procedures, Inquiry)

---

#### 1. Inspection

Examining records or documents (internal or external, paper/electronic/other media) or conducting a physical examination of an asset.

Key points:

Reliability varies depending on nature, source, and controls over production of the document
Used as test of controls: e.g., inspecting records for evidence of authorisation
Some documents are direct evidence of existence: e.g., a stock certificate is direct evidence that the financial instrument exists
Limitation: Inspection of a document does NOT provide evidence about ownership or value

---

#### 2. Observation

Looking at a process or procedure being performed by others.

> Example: Watching the client's staff conduct physical inventory count

Limitation: Evidence is only valid at the point in time of observation.

---

#### 3. External Confirmation

Obtaining a direct written response from a third party.

> Examples: Debtor confirmations (SA 505), bank confirmations, legal letters

---

#### 4. Recalculation

Checking the mathematical accuracy of documents or records.

> Examples: Re-adding depreciation schedules, recalculating interest expense

---

#### 5. Reperformance

Auditor independently executing procedures or controls that were originally performed by the entity.

> Example: Auditor re-runs the aged debtors analysis using the raw data to verify the entity's output

---

#### 6. Analytical Procedures

Evaluating financial information through analysis of plausible relationships among financial and non-financial data.

> Example: Comparing gross margin % this year vs. prior year; comparing sales per employee to industry benchmarks

---

#### 7. Inquiry

Seeking information from knowledgeable persons — financial or non-financial — within or outside the entity.

> Inquiry alone is rarely sufficient — it must be corroborated by other procedures.

---

### Tests of Controls vs. Substantive Procedures

	Tests of Controls	Substantive Procedures
Purpose	Evaluate operating effectiveness of controls	Detect material misstatements
Level	Assertion level	Assertion level
Examples	Inspecting authorisation signatures, re-performing reconciliations	Confirming balances, examining invoices, analytical procedures

Substantive procedures consist of:

Tests of Details (SA 500, 501, 505, 510)
Substantive Analytical Procedures

Worked example

### Example 1

Example — Inspection vs. Observation: For inventory, the auditor (a) OBSERVES the client's staff conducting the physical count on 31 March, and (b) INSPECTS the count sheets signed by supervisors afterwards. Observation gives direct evidence; inspection of signed sheets provides evidence of the control (supervisory authorisation) operating effectively.

### Example 2

Example — Recalculation vs. Reperformance: For depreciation: RECALCULATION = the auditor takes the asset register and applies the rates to check arithmetic. REPERFORMANCE = the auditor independently runs the entire depreciation process from scratch using the entity's stated policy, then compares to the entity's figure.

### Example 3

Example — Why Inquiry Alone Is Insufficient: An auditor asks the finance manager, 'Are all sales genuine?' The manager says yes (inquiry). This alone is not sufficient — the auditor must corroborate by inspecting invoices, confirming with customers (external confirmation), and performing analytical procedures on unusual revenue patterns.

### Example 4

Example — Stock Certificate and Ownership Limitation: The auditor inspects a share certificate for 10,000 shares of Reliance Industries held by the client. This confirms existence of the certificate. However, it does NOT confirm: (a) whether the client legally owns the shares (ownership — check demat statement), or (b) the fair value of the shares (valuation — need market price).

⚠️ Common exam mistakes

Confusing Recalculation (checking arithmetic on what exists) with Reperformance (independently re-executing the procedure).
Treating inquiry as a standalone procedure — SA 500 requires corroboration; inquiry alone is almost never sufficient.
Assuming inspection of a document establishes ownership or value — it only establishes existence.
Confusing Tests of Controls with Substantive Tests of Details — tests of controls assess whether controls WORK; tests of details look for actual misstatements in amounts.
Forgetting that observation evidence is time-limited — it is only valid at the moment of observation, not thereafter.
Not linking Risk Assessment Procedures to Further Audit Procedures — risk assessment informs what further procedures are needed and at what level of intensity.

Bare-Act text Q6(i) – Definition and scope of Inspection as an audit procedure · SA 500 – Audit Evidence · click to expand

Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or other media, or a physical examination of an asset. Inspection of records and documents provides audit evidence of varying degrees of reliability, depending on their nature and source and, in the case of internal records and documents, on the effectiveness of the controls over their production.

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